When selling a private practice, whether a CPA firm or a physical therapy clinic, it’s common to find a competitor interested in buying the business. Selling your practice to a competitor is a difficult decision, so we’ve listed the pros and cons of the transaction below to help those considering the option.
The Benefits of Selling to a Competitor
While it may be emotionally difficult to sell something as important as a practice to someone you’ve been directly competing with for so long, there are many advantages to doing so. For owners, selling to a competitor could mean an easier transition, a better deal, and a stronger company for your employees and clients.
They Know the Business
One of the strengths of selling to a competitor is selling to someone who intimately understands the business and the industry. In many ways, selling to a competitor makes the ownership transition easier and smoother for everyone involved.
As the seller, you won’t feel obligated to explain everything to the new owner, and the new owner can hit the ground running faster, so there’s less of a hiccup for your loyal customers and employees. And selling to a competitor who knows the business can give peace of mind to sellers worried the new owner may tarnish the name and reputation of the company they spent so much time building.
Quick Exit for You
Selling to a competitor who knows and understands the business also makes for a much quicker and easier exit for the seller. Because the competitor already has their own management and leadership familiar with the business, the seller doesn’t have to hold their hand and guide them through the transition as much.
If your goal is to get out of the business as quickly as possible to enjoy retirement or start another venture, selling to a strategic buyer that already knows what they’re doing is the fastest way to get out and move on.
Competitors Provide a Knowledgeable & Outside Perspective
Selling to a competitor could also be the best-case scenario for your practice after you’re gone because while they understand the business, they still come in with a fresh, outside perspective. Every business can gain from having a fresh set of eyes and a new voice to observe operations and offer new ideas.
Competitors can provide a new perspective while still bringing background expertise in the industry to practice. And, while it may pain some owners to admit, your competitors likely do some things better than you, and they have ideas that can improve the practice for clients and employees. Sometimes, selling to a competitor can be the best way to ensure your practice survives and thrives.
Want More of Your Assets
When selling an accounting firm or other practice, sellers can do an entity or asset sale. When selling to a direct competitor, they’re more likely to be interested in more or all of the assets as they understand them better and know why they’re needed.
Asset sales could significantly increase the value of the practice in the competitor’s eyes because they understand the practice’s assets better than anyone. But, since they’re more familiar with the industry, sellers will have a more challenging time inflating their asset’s value over new or inexperienced buyers.
Another benefit of selling to a competitor is that it’s typically much easier for them to find reliable financing, which could mean a better deal for the seller. If the competitor is another small business, they can likely secure a Small Business Administration (SBA) loan, using their existing business as collateral.
Buyers who can secure better loans are more likely to pay more for the business, and buyers with existing businesses generally have more cash on hand and strong banking relationships to make competitive offers. When selling to a competitor, financing is typically not a significant concern like it may be with others.
The Downsides to Selling to a Competitor
While there are undoubtedly plenty of pros, there are also cons to selling your practice to a competitor. Some downsides are more emotional and irrational, but there are also financial cons to negotiating and selling to a competitor.
While selling to a competitor may make all the business sense, selling to an organization they have competed with for years can irk some business owners. It can feel like waving a white flag of surrender and failure for some owners, but this is an irrational response.
Owners should never forget that their duty is to secure the best offer for themselves and the company’s future well-being, regardless of where it comes from. Practice owners shouldn’t let an old grudge and bad blood come between a good deal that makes everyone happy, even if it is through gritted teeth.
Gain Insider Information
One thing that sellers have to be wary of when selling to a competitor is that they may have underhanded motivations and schemes with no intention of buying the practice. During the exploratory and due diligence process of negotiating, potential buyers can access sensitive and financial information about the company—information that could be like gold to a competitor.
Unfortunately, some competitors would do anything to gain an advantage, including showing false interest in purchasing the competition to gain access to sensitive information for their benefit and tank the sale. While this is a concern, there’s an easy fix for sellers: make any potential buyer sign a non-disclosure agreement (NDA). With an NDA, every interested buyer must keep agreed-upon confidential information confidential or face legal action.
Motivation Is To Eliminate Competition
Another potential downside to selling to the competition is that the buyer may only want to eliminate the competition instead of growing the practice. It’s not uncommon for larger companies to buy out the smaller competition to gain a greater market share without any intention of maintaining the business.
If this is the buyer’s goal, they will reduce holdover employees or eliminate operations completely. If your concern is also the future and longevity of the company, you’ll have to use your instincts to gauge how committed the buyer is to growing the business rather than eliminating their competition.
There are many things to consider when selling to a competitor, but Private Practice Transitions can help you weigh the options available and make the best decision. Contact our team of business brokers today if you need help with your private practice transition.